New Zealand Dollar Sold in Asia as Current Account Deficit Data Disappoints

The British Pound faces hefty event risk in the coming hours. The Bank of England is due to publish minutes from this month’s MPC meeting, with traders keen to see if the three dovish policymakers that voted for an expansion of QE last month were able to win over additional support. Most notably, another vote in favor of expanded stimulus from Governor Mervyn King may undermine his recent Pound-supportive commentary and put downward pressure on the currency. Later in the day, Chancellor of the Exchequer George Osborne will present the 2013 UK budget. A continued focus on fiscal consolidation against a backdrop of sluggish growth is likely to boost the perceived need for monetary accommodation, punishing Sterling.

Finally, the spotlight turns to the Federal Reserve for the FOMC policy announcement. Investors appear to have treated supportive US economic news as limiting the scope for Federal Reserve stimulus over recent weeks, with the US Dollar tellingly rising alongside stocks when high-profile reports (notably the NFP release) crossed the wires. The markets’ own consensus forecasts don’t seem to justify this dynamic however. A poll of private-sector economists from Bloomberg shows they expect US growth to slow to 1.9 percent this year from 2.2 percent in 2012 while the jobless rate prints at 7.7 percent and inflation holds at 1.8 percent, well off the Fed’s “Evans rule” parameters for unwinding stimulus.

With that in mind, even a familiarly dovish FOMC statement seems to have scope to jolt traders back to the realization that the Fed is in no hurry to taper asset purchases or otherwise pare back stimulus efforts. That is likely to bolster optimism about performance in the world’s top economy, proving broadly supportive for risk appetite. It likewise stands to undermine recent support for the greenback, casting it as a funding currency once again and underscoring the comparative attraction of higher-yielding alternatives.

Most major currencies were little changed in overnight trade. The New Zealand Dollar underperformed after fourth-quarter Current Account figures showed a wider deficit than economists expected at 3.26 billion. In relative terms that amounts to 5 percent of GDP, the highest in over three years. On balance, a wider Current Account gap implies net capital outflows out of a given economy, which puts longer-term downward pressure on the relevant currency.